Real Activity Manipulation through Operating Cash Flow and Market Performance

Abstract

The objectives of this study are twofold. Firstly, it analyzes whether cash flow from the operating activity (CFOA) is able to detect earnings management. Secondly, it tests whether the market performance of the firms that are probably to undertake earnings manipulation is different compared to their counterparts that are not like to undertake earnings manipulation. A total of 100 firm-years data were analyzed. The population of the study comprises all liquid stocks listed in the Indonesian stock exchange, covering a period from 2012-2015 (four years). The samples consist of 25 firms that met the selection criteria. The hypotheses were tested using a combination of a parametric test (t-test for mean) and a non-parametric test (Mann-Whitney test for the median). The test of the first hypothesis reveals that CFOAs are used by firms to perform real activity manipulation. The test of the second hypothesis shows that the firms which are more predictable to perform in real activity manipulation on average have a better appreciation by capital market participants than their counterparts.